The Market Today
Jobless Claims Improve; Treasury Yields Give Back CPI Gains as Powell Sticks to Transitory Story
by Craig Dismuke, Dudley Carter
Initial Jobless Claims Decline: After a higher revision to the previous week’s tally, initial jobless claims for the week ending July 10 fell 26k to 360k. While the decline was larger than expected, the overall level ended up being higher due to the revision. Initial PUA claims also fell during the week, down 4k to 96k. Total initial filings for unemployment assistance fell from 487k to 456k.
Continuing Claims Continue Positive Trend: Continuing jobless claims for the week ending July 3 were notably better than expected, dropping from 3.37mm to 3.24mm, down 124k to the lowest level of the pandemic. The improvement was broad-based with 39 states reporting fewer claims. The pandemic programs also continued their run of improvement in the week ending June 26. Continuing PUA claims fell 138k to 5.69mm, the lowest level since the program’s inception, while continuing PEUC claims fell 198k to 4.71mm. All told, total claims for the June 26 reference week fell 372k to 13.837mm, the lowest of the pandemic.
Mixed-but-Positive Regional Fed Reports: The Philadelphia Fed’s report on regional manufacturing activity dropped more than expected, down from 30.7 to 21.9, on relatively broad-based weakness. On a negative note, the delivery times index increased again. On a positive note, the prices paid and prices received indices both pulled back from extremely high levels. The New York Fed’s report, also released this morning, jump sharply above expectations, up 25.6 points to a new record-high 43.0. In contrast to the Philadelphia Fed report, the details were broadly better, including the best new orders index and future hiring index on record. The price indices remained elevated but were mixed.
Industrial Production: At 8:15 a.m. CT, the June Industrial Production report is expected to show manufacturing output regain another 0.3% of its lost activity. The manufacturing recovery has remained hampered by the ongoing supply chain issues, including the chip shortage in the auto industry.
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Treasury Yields Gave Back CPI Gains as Powell Stuck to Transitory Story: Stocks ended mixed and little changed Wednesday while Treasury yields more than unwound their Tuesday increases, which had been spurred by a surprisingly hot CPI inflation report and disappointing results from an auction of 30-year Treasury debt. Wednesday’s moves in Treasury yields overshadowed an unexciting day in the equity markets and was led by large declines in longer yields that flattened the curve. The move was already underway overnight but picked up pace as the release of Fed Chair Powell’s prepared remarks for his Congressional testimony outweighed another hot producer price inflation (PPI) report. Fed Chair Powell’s outlook for the economy and monetary policy didn’t veer much, if any, from his previous public remarks (more below), interpreted more dovishly by markets on the heels of Tuesday’s surprisingly strong CPI inflation data. For the day, the 10-year Treasury yield dropped 7.1 bps to 1.346%, ending near session lows. The 2-year yield fell 3.0 bps to 0.223% and the 5-year yield shed 5.1 bps to 0.795%, both also closing near their low points of the day.
Longer Treasury yields extended their slide overnight and were lower heading into this week’s update on unemployment insurance claims. The 10-year yield fell as many as 3.7 bps to as low as 1.309% early in the European session, but had trimmed that drop to 2.0 bps around 7 a.m. CT. Shorter yields, however, had inched higher following yesterday’s declines; the 2-year and 3-year yields had added 0.5 bp. Stock futures were near the lows of the day, with the Nasdaq giving up earlier gains to trade flat and the Dow 0.4% lower. Globally, equity markets were trading weaker in Europe after a mixed session in Asia. Chinese stocks were among Thursday’s top global performers following the release of several solid economic data points for June, including better-than-expected monthly retail sales, and unannualized QoQ 2Q GDP growth of +1.3% (~+5.3% annualized) that topped the 1.0% gain expected. Just before the jobless claims data were released, the 2-year and 10-year Treasury yields were holding their earlier moves of +0.4 bps and -2.2 bps. The drop in claims and mixed manufacturing survey results from a couple of regional Fed banks didn’t dislodge yields from those pre-release levels.
Fed’s Powell Surprised by June’s Hot CPI Report But Sticks To His Transitory Story: Fed Chair Powell acknowledged in his testimony before the House Financial Services Committee that June’s CPI report showed inflation continued to run at a higher pace than the Fed and most other forecasters had hoped for or expected. However, he was persistent in his support of the narrative that most of the pressures behind these stronger readings will dissipate over time, and that inflation will fall back closer to the Fed’s 2% target. In responses to a multitude of questions on inflation, the topic that dominated the questions and answers session, he indicated that he believed the details of June’s CPI report show that most of the outsized pressures continued to emanate out of sectors facing supply issues or dealing with a surge in demand as the economy reopens, dynamics that should abate. However, he also pledged to respond if the current narrative of transitory inflation is proven to be untrue and inflation expectations become unanchored from levels consistent with the Fed’s 2% target. For now, “there is still a long way to go” in the labor market’s recovery and “reaching the standard of ‘substantial further progress’ is still a ways off.”
Beige Book Shows Supply Constraints Continue to Limit Activity and Lift Prices: The Fed’s latest Beige Book reported that stronger economic activity across the country was leading to broader supply constraints and some concerns that the disruptions could continue in the months ahead. The report described economic growth since the previous report through early July as “moderate to robust.” While “the outlook for demand improved further,” the “supply-side disruptions became more widespread” and “many contacts expressed uncertainty or pessimism” around those constraints easing in the near-term. Worker shortages also remained widespread, limiting the pace of hiring and some economic activity and leading to “moderate” overall wage growth and “above-average pay increases” for lower-wage sectors. An “above-average pace” of inflation was “broad-based,” but “more acute in the hospitality sector.” “While some contacts felt that pricing pressures were transitory, the majority expected further increases in input costs and selling prices in the coming months,” the report said. While Powell reiterated in his Congressional testimony that he believes strong inflation pressures will ultimately prove transitory, he also said, “We hear that through a loudspeaker,” when asked if he’s aware that businesses are currently feeling faster price increases.
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